Better reducing workplace pension contribution in favour of Personal Pension?

silvercue

I recently paid off my mortgage so I increased my workplace pension contributions to the max allowed.  This does not mean I get any more contributions from my employer.   I am pleased with this as I pay 40% tax usually, so I am avoiding that tax and when I claim my pension I beleive I will pay 20% tax on it (generally) so I am effectively saving that additional 20% tax by doing this.

I have only recently discovered that for personal pensions you can get 25% of the value of your contribution added by the Gov.  And then can claim further tax relief on what you have paid in if you do a tax assessment form yearly.   So, I thought I could also start a personal pension - add in some savings, but that plan is hindered by the fact you can only pay 40k in a year to any pension before you get taxed.   

So I considered whether I am better off reducing my overpayments into workplace pension and adding them instead to a personal pension.    If I pay 20% tax on my pension when I draw it - I am potentially better off this way (ignoring pension performance for now) than by over paying into my workplace pension.

I wonder if anyone here has weighed up these options and which they found to be better.

I am 51 by the way and will start to take some tax free lump sums before retirement age

Thanks

Dazed_and_C0nfused

I think you are a bit confused.

In the majority of cases there is no real difference between personal contributions and those made via a workplace scheme.

What method is used to get money into the workplace scheme?

The normal methods are,
Net pay i.e. salary £60k less 10% pension = taxable salary of £54k

Relief at source (RAS) (paid out of post tax pay but the pension company adds basic rate tax relief)

Salary sacrifice (you agree to a lower salary in return for you employer contributing more to the pension).

silvercue

I pay additional into the workplace pension via salary sacrifice.  So I pay 50% of my salary in before tax rather than 5%.  So I am paying very little income tax now.

dunstonh

I have only recently discovered that for personal pensions you can get 25% of the value of your contribution added by the Gov. 

Its actually a 20% relief (at source).  I know it equates to 25% when you look at it as an addition but tax relief is a reduction.

I have only recently discovered that for personal pensions you can get 25% of the value of your contribution added by the Gov.  And then can claim further tax relief on what you have paid in if you do a tax assessment form yearly.   So, I thought I could also start a personal pension - add in some savings, but that plan is hindered by the fact you can only pay 40k in a year to any pension before you get taxed.   

The annual allowance applies to all pensions.  Its a personal allowance of your combined pensions.  
   And whether its a workplace or individual pension doesn't matter in terms of tax relief.  You get the same.    However, if the employer operates salary sacrifice, you get further reliefs by paying lower national insurance.

If I pay 20% tax on my pension when I draw it - I am potentially better off this way (ignoring pension performance for now) than by over paying into my workplace pension.

If you are a basic rate taxpayer in retirement, then the net effective rate is 15% as 75% of your pension withdrawals are taxable and 25% tax free.  Plus, the state pension doesn't use up all of your personal allowance.   So, a bit will fall within the personal allowance.

I wonder if anyone here has weighed up these options and which they found to be better.

Its pensions 101.  

I am 51 by the way and will start to take some tax free lump sums before retirement age

Do you need to do that?   Going into drawdown whilst working means you will get less in tax free cash over your lifetime compared to taking it on drip.    Robbing your retirement years to spend on something in your working years is not normally a good idea.

Albermarle

silvercue said:

I pay additional into the workplace pension via salary sacrifice.  So I pay 50% of my salary in before tax rather than 5%.  So I am paying very little income tax now.

So you get full tax relief by doing this, as you are not paying any tax on the amount you salary sacrifice. You also get some NI saving.
If you instead paid into a personal pension from your already taxed pay, Then basic rate tax relief would be added by the provider and you would have to claim any higher rate relief due from HMRC.

In the end the only differences are
With salary sacrifice you get a NI saving , which you do not with a personal pension.
With salary sacrifice, all the tax relief is paid into your pension, as you do not pay any tax on what you have salary sacrificed.
With a personal pension only the basic rate tax relief goes into the pension. Any higher rate relief due comes back to you directly.

On withdrawal either pension will be subject to exactly the same tax regime.

So unless for some reason you are particularly unhappy with the workplace pension ( not enough investments choice for example) then seems to be no reason to change.

P1Fanatic

Not sure where you are  getting the 25% from. Maybe you mean having to claim the difference between basic rate and the 45% (as only basic rate 20% is usually paid automatically):

https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief

Claim tax relief in England, Wales or Northern Ireland

You can claim additional tax relief on your Self Assessment tax return for money you put into a private pension of:

• 20% up to the amount of any income you have paid 40% tax on
• 25% up to the amount of any income you have paid 45% tax on

As above Salary Sacrifice is the most efficient way to pay into pensions currently (as also covers NI rebates and NI relief depending on how your employer does it). If you are already maxed out at £40k for the year then worth checking what you didn't use in the past 3 years as you can use that for carryover. Handy calculator here:

https://www.hl.co.uk/pensions/contributions/carry-forward-rule/annual-allowance-calculator

Obviously you need to keep an eye on this going forward with pay rises etc that will increase you contributions if set as a percentage of salary.

Also something to be aware of as I wasn't until fairly recently (and it maybe different in your company) - I can up my personal contribution % at any time but if I want to decrease it I can only do that in 1 month of the year (so its not full flexible in both directions). Just in case you were doing this as a short term increase.

MX5huggy

P1Fanatic said:

Not sure where you are  getting the 25% from. Maybe you mean having to claim the difference between basic rate and the 45% (as only basic rate 20% 

It comes from when you pay into a SIPP 25% of that payment is then added by the provider as the tax relief from the Government.
eg pay in £4000 4 to 6 weeks later £1000 is added. It’s actually 20% tax relief on £5000 but that’s not how it shows up in reality. 

silvercue

MX5huggy said:

P1Fanatic said:

Not sure where you are  getting the 25% from. Maybe you mean having to claim the difference between basic rate and the 45% (as only basic rate 20% 

It comes from when you pay into a SIPP 25% of that payment is then added by the provider as the tax relief from the Government.
eg pay in £4000 4 to 6 weeks later £1000 is added. It’s actually 20% tax relief on £5000 but that’s not how it shows up in reality. 

Yes, this is the 25% I am talking about.

So, if I understand the replies (and thank you everyone),  even taking that 25% into account and further tax relief for higher tax payer via Tax Returns...... I am not better off paying into personal pension rather than workplace pension (ignoring pension performance)

Zanderman

silvercue said:

MX5huggy said:

P1Fanatic said:

Not sure where you are  getting the 25% from. Maybe you mean having to claim the difference between basic rate and the 45% (as only basic rate 20% 

It comes from when you pay into a SIPP 25% of that payment is then added by the provider as the tax relief from the Government.
eg pay in £4000 4 to 6 weeks later £1000 is added. It’s actually 20% tax relief on £5000 but that’s not how it shows up in reality. 

Yes, this is the 25% I am talking about.

So, if I understand the replies (and thank you everyone),  even taking that 25% into account and further tax relief for higher tax payer via Tax Returns...... I am not better off paying into personal pension rather than workplace pension (ignoring pension performance)

Yes, you're not better off doing that as tax relief applies to the work pension too, your 'discovery' of tax relief on personal pensions is missing the key point; the same pension tax relief applies to all pensions, so you're already getting it on your work pension.

dunstonh

So, if I understand the replies (and thank you everyone),  even taking that 25% into account and further tax relief for higher tax payer via Tax Returns...... I am not better off paying into personal pension rather than workplace pension (ignoring pension performance)

The workplace scheme is better if the employer operates salary sacrifice and allows your full contribution.
There is no difference if the employer doesn't operate salary sacrifice.

Apodemus

Should the OP not also be considering the actual details of the workplace pension?  For all we know from the above, it could come with guaranteed, salary-based levels of future pension income, spouse benefits, death-in-service benefits, indexing, provisions for redundancy etc.  None of which would be met by a SIPP.  On the other hand, the workplace may be in a risky industry and the pension scheme may be at more of a risk of default.   Also, the OP should investigate how each is likely to balance out if they choose to retire early, or need to for health reasons.